Wall Street Beat: Chips take a dip

Intel and AMD's share prices slid Thursday in the wake of Citigroup downgrading them, citing prospects of a weakening market

IT investors this week were worried about the big chip makers, as the Nasdaq stock exchange remains well below the year's opening level.

Citigroup Inc., citing prospects of a weakening PC market and a price war, lowered ratings on both Intel Corp. and archrival Advanced Micro Devices Inc. Share prices of the two companies slid Thursday in the wake of the report, as did shares of Qualcomm Inc. Qualcomm (ticker symbol: QCOM) Thursday lost US$1.03 to close at $44.45, Intel (INTC) dropped $0.28 to close at $17.09, and AMD (AMD) slid $0.97 to close at $27.03.

Despite the declines, the year overall is not going as badly for the PC and chip markets as had been predicted. For example, worldwide PC shipments were strong in the first quarter, according to both Gartner Inc. and IDC. Earlier this year, IDC reported worldwide growth of 12.9 percent for the first quarter, which beat its earlier forecast of an 11.8 percent jump.

And just last week, World Semiconductor Trade Statistics (WSTS) said that global chip revenue this year could jump 10.1 percent over last year, to $250 billion. This was significantly higher than its earlier prediction of 8 percent growth, and last year's 6.8 percent increase.

Major concerns, though, center around larger economic forces. For example, in remarks to the U.S. Senate, Federal Reserve Governor Donald Kohn mentioned that he was worried about inflation. This came in the wake of similar comments earlier in the week by Fed Chairman Ben Bernanke. If prices rise overall, it will leave companies with less financial room to buy computer equipment.

Similar worries led central bankers in South Korea, India and South Africa to raise interest rates this week.

Though U.S. unemployment is low and overall gross domestic output is strong, there is an underlying sense of skittishness about the economy, according to IDC. "Late in May stock markets seemed to plummet on a single announcement of downturn in U.S. consumer confidence," said IDC Chief Research Officer John Gantz in the company's June FutureScan market report. "The question is, how fragile is the current booming U.S. economy?"

Vendors themselves remain cautious. At the giant Computex trade show in Taipei this week, Intel vowed that it has resolved the chipset shortage problem of last year. But the company is still forecasting a 3 percent decline in revenue for the year and promises a reorganization. This has led this week to rumors of massive layoffs.

There are bright spots. Markets closed Thursday in better shape than was expected earlier in the day, and could continue to rebound. Companies that make equipment for semiconductor manufacturers are holding their own. For example Applied Materials Inc. (AMAT) closed Thursday at $16.61, up $0.24, and Novellus Systems Inc. (NVLS) closed at $24.15, up by $1.71.

But until there are several quarters in a row of good news, investors are holding their breath.

REFERENCES:
Global chip growth forecast for 2006 revised up, May 30, 2006
Chipset woes are over, Intel vows, Jun. 7, 2006

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